Welcome to Uneasy Money, aka the Hawtreyblog

What the world needs now, with apologies to the great Burt Bachrach and Hal David, is, well, another blog. But inspired by the great Ralph Hawtrey and the near great Scott Sumner, I decided — just in time for Scott’s return to active blogging — to raise another voice on behalf of a monetary policy actively seeking to promote recovery from what I call the Little Depression, instead of the monetary policy we have now: waiting for recovery to arrive on its own. Just like the Great Depression, our Little Depression was caused mainly by overly tight money in an environment of over-indebtedness and financial fragility, and was then allowed to deepen and become entrenched by monetary authorities unwilling to commit themselves to a monetary expansion aimed at raising prices enough to make business expansion profitable.

That was the lesson of the Great Depression. Unfortunately that lesson, for reasons too complicated to go into now, was never properly understood, because neither Keynesians nor Monetarists had a fully coherent understanding of what happened in the Great Depression. Although Ralph Hawtrey — called by none other than Keynes “his grandparent in the paths of errancy,” and an early, but unacknowledged, progenitor of Chicago School Monetarism — had such an understanding, Hawtrey’s contributions were overshadowed and largely ignored, because of often irrelevant and misguided polemics between Keynesians and Monetarists and Austrians. One of my goals for this blog is to bring to light the many insights of this perhaps most underrated — though competition for that title is pretty stiff — economist of the twentieth century. I have discussed Hawtrey’s contributions in my book on free banking and in a paper published years ago in Encounter and available here. Patrick Deutscher has written a biography of Hawtrey.

What deters businesses from expanding output and employment in a depression is lack of demand; they fear that if they do expand, they won’t be able to sell the added output at prices high enough to cover their costs, winding up with redundant workers and having to engage in costly layoffs. Thus, an expectation of low demand tends to be self-fulfilling. But so is an expectation of rising prices, because the additional output and employment induced by expectations of rising prices will generate the demand that will validate the initial increase in output and employment, creating a virtuous cycle of rising income, expenditure, output, and employment.

The insight that “the inactivity of all is the cause of the inactivity of each” is hardly new. It was not the discovery of Keynes or Keynesian economics; it is the 1922 formulation of Frederick Lavington, another great, but underrated, pre-Keynesian economist in the Cambridge tradition, who, in his modesty and self-effacement, would have been shocked and embarrassed to be credited with the slightest originality for that statement. Indeed, Lavington’s dictum might even be understood as a restatement of Say’s Law, the bugbear of Keynes and object of his most withering scorn. Keynesian economics skillfully repackaged the well-known and long-accepted idea that when an economy is operating with idle capacity and high unemployment, any increase in output tends to be self-reinforcing and cumulative, just as, on the way down,each reduction in output is self-reinforcing and cumulative.

But at least Keynesians get the point that, in a depression or deep recession, individual incentives may not be enough to induce a healthy expansion of output and employment. Aggregate demand can be too low for an expansion to get started on its own. Even though aggregate demand is nothing but the flip side of aggregate supply (as Say’s Law teaches), if resources are idle for whatever reason, perceived effective demand is deficient, diluting incentives to increase production so much that the potential output expansion does not materialize, because expected prices are too low for businesses to want to expand. But if businesses can be induced to expand output, more than likely, they will sell it, because (as Say’s Law teaches) supply usually does create its own demand.

Keynesians mistakenly denied that monetary policy could, by creating price-level expectations consistent with full employment, induce an expansion of output in a depression. But at least they understood that the private economy can reach an impasse with price-level expectations too low to sustain full employment. Fiscal policy may play a role in remedying a mismatch between expectations and full employment, but fiscal policy can only be as effective as monetary policy allows it to be. Unfortunately, since the downturn of December 2007, monetary policy, except possibly during QE1 and QE2, has consistently erred on the side of uneasiness.

With some unfortunate exceptions, however, few Keynesians have actually argued against monetary easing. Rather, with some honorable exceptions, it has been conservatives who, by condemning a monetary policy designed to provide incentives conducive to business expansion, have helped to hobble a recovery led by the private sector rather than the government which they profess to want. It is not my habit to attribute ill motives or bad faith to people whom I disagree with. One of the finest compliments ever paid to F. A. Hayek was by Joseph Schumpeter in his review of The Road to Serfdom who chided Hayek for “politeness to a fault in hardly ever attributing to his opponents anything but intellectual error.” But it is a challenge to come up with a plausible explanation for right-wing opposition to monetary easing.

In condemning monetary easing, right-wing opponents claim to be following the good old conservative tradition of supporting sound money and resisting the inflationary proclivities of Democrats and liberals. But how can claims of principled opposition to inflation be taken seriously when inflation, by every measure, is at its lowest ebb since the 1950s and early 1960s? With prices today barely higher than they were three years ago before the crash, scare talk about currency debasement and future hyperinflation reminds me of Ralph Hawtrey’s famous remark that opponents of leaving the gold standard during the Great Depression on the grounds that it would bring on a German-style hyperinflation were like those crying “fire, fire” in Noah’s flood.

The groundlessness of right-wing opposition to monetary easing becomes even plainer when one recalls the attacks on Paul Volcker during the first Reagan administration. In that episode President Reagan and Volcker, previously appointed by Jimmy Carter to replace the feckless G. William Miller as Fed Chairman, agreed to make bringing double-digit inflation under control their top priority, whatever the short-term economic and political costs. Reagan, indeed, courageously endured a sharp decline in popularity before the first signs of a recovery became visible late in the summer of 1982, too late to save Reagan and the Republicans from a drubbing in the mid-term elections, despite the drop in inflation to 3-4 percent. By early 1983, with recovery was in full swing, the Fed, having abandoned its earlier attempt to impose strict Monetarist controls on monetary expansion, allowed the monetary aggregates to grow at unusually rapid rates. However, in 1984 (a Presidential election year) after several consecutive quarters of GDP growth at annual rates above 7 percent, the Fed, fearing a resurgence of inflation, began limiting the rate of growth in the monetary aggregates. Reagan’s secretary of the Treasury, Donald Regan, as well as a variety of outside Administration supporters like Arthur Laffer, Larry Kudlow, and the editorial page of the Wall Street Journal, began to complain bitterly that the Fed, in its preoccupation with fighting inflation, was deliberately sabotaging the recovery. In fact, the argument against the Fed’s tightening of monetary policy in 1984 was not without merit. But regardless of the wisdom of the Fed tightening in 1984 (when inflation was significantly higher than it is now), holding up the 1983-84 Reagan recovery as the model for us to follow now, while excoriating Obama and Bernanke for driving inflation all the way up to 1 percent, supposedly leading to currency debauchment and hyperinflation, is just a bit rich. What, I wonder, would Hawtrey have said about that?

In my next posting I will look a little more closely at some recent comparisons between the current non-recovery and recoveries from previous recessions, especially that of 1983-84.

Is you rationale for thinking that “the argumnet against Fed tightening in 1983-84 is not without merit” based on the fact that wages were constinuing to decelerate through 1984? Because core inflation was certainly moving up – by early 1984 it was back above 5% – and expectations were certainly not well anchored.

Glasner wrote a 1995 UCLA working paper talking about how stupid it was for the U.S. to stay on the gold standard during the depression. He argued that deflation occurred due to Smoot-Hawley, making it hard for Germany to repay its WWI debts in trade, and thus had to use gold. He then postulated that the depression could have been avoided had the US moved off the gold exchange standard. Of course, repudiating gold so soon after setting up the gold exchange standard in the Genoa conference of 1923 would have revealed the U.S. to be completely without scruples with regard to its own currency. Glasner could have equally argued for Germany to repudiate its war debts, but he did not. Evidently Glasner feels world trade operates by creditors inflating their currency, so that if debtor’s debt is denominating in the creditors’ currency it makes it easier to pay it off. He misses the point that the gold standard, while exacting harsh discipline on ill-advised debtors, stablizes the belief in the value of the currency for all participants. Glasner is searching for the painless correction, and he does so by sticking his hand in your pocket.

I am just starting to get used to this, so please bear with me as I learn how to blog. Thanks to Joshua, Catherine, Benjamin Cole, Dustin, and Gregor Bush for your kind words. About the RSS feed, I absolutely don’t know what that means, but I will try to figure it out or have someone else figure it out for me.,

Nick, I appreciate your careful reading of what I wrote. The “usually” that you picked up on was definitely a “weasel word” whose implications I am not sure I was fully conscious of until you pointed it out. I am not sure that the “unusual” conditions are ones that Hawtrey addressed. And I don’t think that what I had in mind was an excess demand for money, at least not in the standard sense. What I had in mind was rather a situation in which entrepreneurs mistakenly (and I won’t go into what could cause them be mistaken) choose the wrong assortment of goods to produce, so that resources are wasted. The poor choice of products to produce could cause a reduction of demand because incomes fall. This could lead to an Austrian story about the business cycle, but I did not mean to raise that possibility as I don’t share their theoretical presumptions about the causes of business cycles. Hope that helps.

Catherine, were you referring to my paper “Where Keynes Went Wrong”? I believe that it will become available on SSRN in the next week or two, or if you send me an email, I can attach it to my reply.

Gregor, I think that you may have a better handle on what was happening to wages and inflation expectations than I do. What are you using to estimate inflation expectations in 1983-84? My impression is that inflation had stabilized at 3-4 percent and expectations were also stable going into 1985 or 1986. Rather my reservations about Fed policy in 1984 was that it seemed to have been derived from a residual concern about the rapid growth in monetary aggregates, which as a non-Keynesian anti-Monetarist, I don’t believe are good indicators of the stance of monetary policy. So although I believe that tightening was in order coming out of the 1983 recovery, I think the Fed tightening may have been somewhat premature. But I have no strong view on that.

Scott, I don’t think that I much more in the way of a response for your questions than what I just wrote to Gregor. I think that given the depth of the 1981-82 recession it was reasonable to declare victory in the war against inflation at 4 percent. If 4 percent was a good medium term goal for inflation, then the Fed may have been too quick to tighten, especially as the dollar was appreciating relative to other currencies at that time. I also think I recall that Earl Thompson thought that the Fed was tightening too much in 1984. So my overall position about that episode is pretty agnostic. And once again, I just want to say how much I admire your blog and your incredible ability to keep writing interesting and novel things after three years of almost non-stop blogging. So I really appreciate your sharing your readers (or fans as Marcus Nunes calls them, I mean, us) with me while I try to get a few things off my chest.

Marcus, thanks for drawing my attention to your posting, which I agree with. I am going to come at it from a much different angle, but I think that our results are in complete accord.

Morgan, I am not sure if you were trying to be clever or nasty, so I would urge you to make that distinction less ambiguous if you continue to post comments on this blog. You quote a very critical review of my book on the Amazon.com website by someone who was upset by a paper that I wrote on the Great Depression with Ron Batchelder, but had not a word to say about my book. I actually posted a comment on his “review” on the Amazon website, so I invite you to read that comment if you have not done so already.

Thanks, Greg. Greg helped give me develop a taste for blogging when he posted an irate reply that I wrote to a bit of nonsense about Hayek and Keynes written Dick Armey in the Wall Street Journal in early 2009.

I am still mystified, all the experts like Sumner, Cowen, Krugman, Delong, Glasner are in favor of opening up the money spigots…yet the Fed is being held back by a half freshman dozen tea partier congressmen + Ron Paul?

How can this be? why not engage in “QE3 bigger and better”? The Fed is independent right? Isn’t that what everyone said when people starting trying to find out what banks the Fed was buying securities from?

I thought Bernanke promised he would not keep money supply like they did in the 30’s and he was the greatest expert itn eh world ont he great depression and he would NEVER EVER make the mistakes Milton pointed out? Why isn’t he doing what he promised? please pump up some more bubbles…can one of you prominent economist send the message?

It is amazing that the Fed is so high and mighty they won’t even discuss these topics with legitimate PHD monetary economists.

Do you think there may be problems with how this organization makes these important decisions? they will not even communicate in public forums about these topics? The PR press conferences are complete shams with pre-screened theatrical questions. Do you think it is important for the Fed to be so opaque and secretive?

Fed officials publicly admit they talk to the executives of the TBTF banks on the phone daily…yet all we get are canned propaganda. No genuine discussion of ideas allowed. How can we make progress with this type of secrecy?

With regards to Japan, in what way would you say that money has been tight and has spelled ruin? Per capita GDP growth has slowed, but it compares very favourably to the US and to Europe. When one visits Japan, it doesn’t _feel_ like a _depression_.. An extended period of depressed social mood, certainly. But we don’t yet have room for such ideas in mainstream academic economics.

Also, do you not think that it was loose money – in Japan in the 80s and in the US in the 90s – that got us into this mess in the first place? If not, then did the magnitude of the bust come as a complete surprise? You think it can be blamed on the Fed not easing fast enough or as much as they ought to have done. Because if so, then why was it quite possible to say as early as late 2004 that we would have a tremendous bust followed by an extended period of inflation.

In what way are Sumner, present-day Cowen, Krugman and Delong experts on the conduct of monetary policy? (I do not here include David Glasner and Tyler Cowen the free banking theorist from this question since they have previously discussed the dangers of monetary disequilibrium and proposed various institutional changes that might alleviate the knowledge problems of monetary central planning)

I would think that before somebody can be considered to be an expert on real life changes to monetary policy they ought to have demonstrated their superior insight at previous points in the business cycle, rather than just having written respected papers about things that have happened in the past and having the right credentials from prestigious academic institutions.

So I should like to see the public warnings from these guys from 95-99 and again from 2003-2006 that Fed monetary policy was too easy and prudential policy too reckless. Instead I note that in 2002-2003 Krugman was _cheering on_ the creation of a housing bubble (something very much more dangerous than a mere equity bubble).

Of course I don’t say that the Fed has shown itself to be any better. Bernanke has been consistently wrong throughout the developments of recent years, and has admitted as much. Reviewing the minutes of past Fed meetings, Greenspan was not better.

I would note that of people who did understand the dynamics at work (as demonstrated by their identifying the emerging problems correctly and for the right reasons) have rather a different view of appropriate policy from the Gang of Easy Money. I mean more specifically people such as Marc Faber, Jim Rogers, Jim Walker, Jim Grant as well as some financial market practitioners who choose to keep a low profile.

About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.